October 11, 2017 by Robert Tuttle
Canadian oil-sands producers enjoying the strongest market for heavy crude since 2008 will soon face a renewed glut.
Suncor Energy Inc. expects its Fort Hills oil-sands mine to begin producing by year end, reaching as much as 175,000 barrels a day within a year. The startup will roughly coincide with the completion of planned maintenance at Imperial Oil Ltd.’s Kearl mine.
The additions will fill pipelines, such as Enbridge Inc’s Mainline, that move barrels to refining centers and force more crude-by-rail shipments, pressuring prices, said Carl Evans, an oil analyst at Genscape Inc. in Boulder, Colorado, by phone on Tuesday.
“If the mainlines can’t do any more, you are going to have to see prices to encourage movement by rail,” he said.
Western Canadian Select will probably trade at a $12-to-$15 a barrel discount to West Texas Intermediate futures by the first quarter versus a differential of less than $10 for part of this year, Evans said. The crude was at $11.15 below WTI on Tuesday.
Shipping by rail is more expensive than by pipeline, generally requiring a bigger discount in the price. As pipelines fill up, crude exports by rail could rise to 400,000 barrels a day early next year, Evans said. That’s up from 92,000 barrels a day in July, National Energy Board data show.
Western Canadian Select has averaged an $11.44 a barrel discount to WTI so far this year as the Organization of Petroleum Exporting countries cut production of their highest-sulfur and heaviest crudes, which are also the least expensive. At the same time, heavy oil exports from Venezuela to the U.S. have has been undermined by political and economic strife in the Latin American country.
The bigger discounts will be a “structural change” for heavy Canadian crude until new export pipelines such as Enbridge’s expanded Line 3 and Kinder Morgan Inc.’s Trans Mountain expansion are completed as early as 2019, Evans said.
Fuller pipelines contrast with the excess capacity in October and September that Enbridge told shippers was available on its heavy lines 4 and 67 running from Alberta to Superior, Wisconsin.
Light Canadian oils such as synthetic crude that’s produced by running oil sands bitumen through an upgrader may also weaken, though not as much as the heavy crude because more pipeline space will be available, Evans said.